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Minggu, 25 Desember 2011

How to advance in stock market trading

I recently received an email from an individual who already gained
extensive hands-on experience in trading, but seems unable to get ahead.
Whenever a large gain was made, it is slowly drained away by little
losses here and there. At the end of the day, he is muddling around
break even:

After all this, I feel I should be further in the game. Instead of
being a consistent breakeven trader, I want to be a consistent profit
maker. Perhaps you can open my eyes to trading.

Upon analyzing his transactions, I believe to have figured out the
root of his problem. The most striking misbehavior is that he scalps the
market up and down and takes way too many opportunities. Taking that
many opportunities will result in many errors because a trader is not
proficient enough to maneuver every move. He took 13 trades on a single
day, very typical for beginners.
Trading off the 2 minute chart as he does is a false belief of having
control over the market. You do not get more details from shorter time
frames, but more confusion.
To design and execute a winning system, you must design yourself to
becoming a winner, too. It implies that you refrain from trading out of
gut feel, but according to rules of your strategy. I believe it's a
fallacy to assume that being break-even is a significant step toward
consistent profitibality. You will think that one final touch to the
strategy will make you profitable. Actually, it just proves that you
cannot hold onto gains and will lose a lot of money very soon. A winner
is someone who can hold onto gains and continue to build up the equity
curve. So take less trades out of gut feel, and more based on objective
observation of trends.

In case you do not have a firm trend following strategy yet, I advice
you to take a step back and look at what is really happening in the
market. Try to interpret the battle of bulls and bears behind.
It's all common sense. Concentrate on pure price action, not on
candlestick formations, head and shoulders, topping patterns, you name
it. They are all a consequence of this dynamic battle anyway. Close the
small time frames and look at nothing below the 1H chart.
I know that you are seeking an indicator that will give you the
answer each time, but a reliable indicator or a combination thereof does
not exist. Do not fall into this trap that so many traders before you
have, and still do. The only indicator which I find helpful is the
exponential moving average (EMA) for general orientation. But beyond
that I use none, not even volume. Only price pays.
Trading is about using common sense and objective analysis. I can
tell you that the successful trend trader always looks at the big
picture, not the small one. And it is quite obvious why. His experience
has taught him that being active is not beneficial.
It is infinitely easier to understand the underlying forces and flow
with them instead of taking a beating up and down. What was the reason
he took those 13 trades? Was the market changing direction that often?
In fact, it was exploding higher and never changed direction on that
particular day. It was not hard to figure out that buying and staying
long was the only sensible thing to do.